Three years on – the power of the Liontrust Multi-Asset investment process

Simon Hildrey [00:00:11] It is three years since the Multi-Asset team enhanced their investment process. I'm joined in this video by James Klempster to talk about the impact of those changes and also the transformations that we're seeing both in politics, economics, and markets. James, let's start with the bespoke SAA that you introduced three years ago now. What impact has that had on your funds and portfolios? 

James K [00:00:36] Well Simon I think the first point really we need to think about why we went through that process at the start. So in the Liontrust Multi-Asset team, as with most investment managers, of course, we have a process. It's tried and tested, and it's one that really has at its heart, I suppose, discipline, but also introspection. And as a result of that, it never really finishes. Once we get to the implementation side, we go back to the beginning. The start of most processes really is understanding what you're investing for. And when it comes to the Liontrust Multi-Asset Funds and portfolios, in particular, the Risk Profiled Funds and portfolios, really, ultimately we're thinking about what sort of budget-to-risk our investors have in each of the different risk bands. And really the best way to inform that over the long term is from the Strategic Asset Allocation. So across the Liontrust business with stakeholders from every different part of the firm, we went and did a detailed tendering process which started in 2022 and culminated in the new Strategic Asset Allocations which started in 2023, in March 2023. And really what we wanted to make sure we had was at its heart a flexible but at the same time robust system that was well placed for the world we're going into rather than the world were coming from. And we think that the drivers of returns over coming decades won't necessarily be the same as the ones we've had and as a result of that who wanted a Strategic Asset Allocation for the 10, 20, 30 years to come, rather than the 10 20,30 years previously. 

Simon Hildrey [00:02:07] And what's been the outcome over the past three years of that in terms of performance? 

James K [00:02:11] In the three years anniversary since we've made that change, the Defaqto peer groups, all of the Risk Profile Funds are first or second quartile, so very competitive results against appropriate peer groups out there. 

Simon Hildrey [00:02:24] And how has the enhancement helped you navigate? It's been quite some three years in markets. How has it actually helped you in that process? 

James K [00:02:31] Certainly, the last three years have been challenging. We've had that big spike up in inflation, which started at the start of 2022. So we had much higher interest rates over that period than we've become accustomed to, new dynamics in markets. Some of this US leadership really burst to the fore in that early stage of that three-year period, and then diminished actually quite substantially over the course of 2025. So I think really, if you look back over that three-year period, what's really sort of the hallmarks of it are ones that diversification really showed its value, not simply as a risk-mitigating device, which is often how we think about diversification in multi-asset investing, but actually as a potential returns enhancer as well. Certainly over the course of 2025, as the US still performed well over the course of the year, but sort of fell into the pack a little bit more, other markets that have been a bit unloved over the last decade or so really came to the fore. So whether it be the UK where we have an overweight, whether it'd be Europe where we're neutral, whether it would be Japan where we'd have an overweight, Asia, ex-Japan, or emerging markets where we also both have an an overweight score of four out of five. All these markets outside the US have done pretty well over the course of the last three years really. 

Simon Hildrey [00:03:51] And bringing it to the current day, markets seem quite calm, but underneath it, there's quite extreme volatility between stocks and between sectors. How are you as a Multi-Asset team kind of navigating that? 

James K [00:04:06] It's the old adage, isn't it? The swan on the surface looking serene, the legs are going crazy under the surface. And the technical word for that is dispersion. When one stock is going up and the other one's going down, they can counteract each other and so on an index level, you don't necessarily see that volatility taking place. We are seeing big rotations take place in markets over, you know, certainly year-to-date, but even slightly longer as well. As a case in point, you may not know this, but the UK stock market actually beat the Magnificent 7 over the course of last year. So there's some big forces, rotational forces sort of going on. Again, what we really want to make sure we do is have diversification and have differentiation come through in the portfolio allocations as well. So diversification in this form of different asset classes. Within those asset classes, different sub asset classes, sectors, regions, investment manager styles. So there's lots of different ways that you can express those views, even in what look like very simple asset class groupings. And then of course, making sure the direction of them, how they're pointing, where they're allocated towards. You know, don't presume that what's worked in the last 10 years will work from here. Make sure it's differentiated and build on top of what's already a disciplined and diversified process, differentiation as well. 

Simon Hildrey [00:05:20] So with this dispersion, we're seeing actually that active management is performing really well. Do you think that this is a start of a kind of new environment for active managers? 

James K [00:05:29] I think it certainly can be. If you think about the extraordinary pressure over the last 20 years, really, where you've seen pretty much every month, some flow out of active managers into passive managers, which do a fantastic job, by the way. We don't want to decry the value of passive as an investment vehicle. But what it isn't is a discerning price setter. It is a price taker. It really operates in a, for want of a better word, naive way, it buys everything on a market capitalisation weighted basis. And so over the last 20 years, if you think about the net sell pressure has really been manifesting itself in these active managers who have differentiated positions versus the index, and the buying pressure is essentially mimicking the index, you can understand why with that flood of money coming in, all the momentum has been really in favour of the market capitalisation weighted names, the big getting bigger, and really it hasn't been an environment that's lent itself to active managers showing their true value add. But in an environment where perhaps there's more dispersion, perhaps there is less of a torrent of money running towards the same opportunities, you've got opportunities for active managers really to sort of demonstrate their value-add, not only in terms of returns, but also in terms of the holistic risk-managed picture as well. And really we think that having active managers as one of the many tools in the toolbox will be very valuable going forwards from here. 

Simon Hildrey [00:06:50] Another thing you've been signaling is the end of US exceptionalism. You said, obviously, last year US did well, but was outperformed by the market. Do you think now we're going to see this where we are at the end US exceptionalism? 

James K [00:07:04] Yeah, I mean, it's always dangerous to make these sorts of sweeping statements. But clearly, again, over the last 10 years or so, with the exception of recent years, almost regardless of what question was asked of markets, the answer was 'the US'. Where should I invest my equity money? The US. The treasury market has done extraordinarily well. The dollar has done extraordinary well. So really, it has been an era until recently, where you've seen that concentrated flow becoming less and less multidimensional, much, much more narrow in terms of its focus, very clearly towards the US. Now we're not trying to suggest the US is bad in any way. Really then, can you look outside the US for better opportunities? And what would those better opportunities be premised on? Fundamental results. What we really mean by that is profitability and profit growth in these businesses. And there's plenty of profitability and profit growth outside the US. It doesn't have all its own way there. The big change, the big swing factor over the course of the last year or so has been sentiment. And you've seen sentiment come through in terms of expansion of price earnings ratios, price-to-book ratios, valuation measures going up, quite simply because at the margin, the flow of capital has been less dominated in the US. It started to look outside the US, and just that drift away has led to valuation moves because of sentiment change. And essentially, it's not even positive sentiment yet. At the moment, I think it's fair to say at best it's probably markets outside the US climbing a wall of worry, perhaps people feeling they have to diversify because tall trees don't grow to the sky in the form of the US, rather than because they definitely want to diversify outside the US. But if that continues and people actually rather than having a non-US choice they are making an active, outside of the US choice, you can see that flow continue and some significant outperformance for markets outside the US from here. 

Simon Hildrey [00:08:57] It's hard not to think that we're in a period of transformation. If you look at geopolitics, if you look at AI technology, economics, society, it feels like we're in a new era, or a return to previous eras in a way. Obviously, you often talk about avoiding political noise. And we all know about the famous quote, 'this time it's different,' is very dangerous. But to what extent as an investor do you have to take these considerations and how is it impacting how you approach an investment? 

James K [00:09:31] Yeah, I mean, it's really essential to sort of bear these points in mind. I think the first instance, if you look back over the last couple of decades, it's never been easy. There's always been lots of different challenges. And even when you think about AI, we've had technological, substantial technological changes over that period, but perhaps not the revolution that is perceived to be happening through AI today. So politically, things are much more changeable perhaps than they were 20 years ago. The global consensus where everyone crowded around a centrist, fairly, you know, positive economic doctrine, there are sort of cracks appearing there. So there are new challenges, there's no doubt about it. So then is it different this time, or are we returning to eras that we've seen in the past? It's always difficult to make direct historical comparisons for obvious reasons. I think the main difference, if there is a difference this time, is there's less fiscal largesse. There has to be at some point a period of tightening belts, governments realising they can't spend in perpetuity, they have to fund it in some way. And we've seen a ballooning of these fiscal deficits, firstly during the Financial Crisis, but most substantially during COVID and the fallout from that COVID-19 period. And so inevitably politics, geopolitics, they are unpredictable, they're ever present. Perhaps there's a bit more of a crescendo there presently, but I think the big difference will be that with gradual, hopefully withdrawal of liquidity from governments and that need to balance the books fiscally, because interest rates are so high today that they can't manage these kind of deficits that they could get away with a few years ago. So with that as a backdrop, again, I think it's a case of you don't have to treat the world as being fundamentally different. We think that patient long-term investing will continue to reward investors. Equity markets will continue to be the bedrock of your portfolio returns. With fixed income as your main diversifier, your ballast in your portfolio. But look beneath the surface, just because markets did well in the past, they may not do well in in the future. And so is it different this time? It is in so far as underneath the surface on a market by market level, a sector by sector level, stylistic level, don't presume that what has worked in the last 10 years will continue to work going forwards from here. 

Simon Hildrey [00:11:46] So are you making any changes or adapting your approach at all for this environment? 

James K Yes. I think what we always try and do is remain alive to active opportunities in the Multi-Asset team. It is a dynamic process. We review our tactical views once a quarter and we, in our last tactical meeting, we've actually moved the US market from a neutral three to a less constructive two out of five on our scoring methodology. That's one of the more meaningful changes we've made in the last few months. And I think what it really reflects again, is not necessarily a concern around the US per se, but a recognition that valuations are high, the market's concentrated, there's a lot of good news in the price, and on balance can we find better opportunities elsewhere? So that's one of the big changes we've had in the equity allocation in recent months. We continue to look stylistically, so that next layer down, make sure we've got a good blend of styles in there as well. And then within fixed income markets, the trick is we believe, to remain diversified. Have government bonds as your sort of ultimate safe haven, even today with the question marks over the fiscal position, we still believe that government bonds remain the ultimate safe haven for investors. But around that have markets like high yield, which is a lower quality fixed income allocation. It has a spread on top, which we believe remains fairly interesting from a compensation point of view as a long-term investor. Investment grade credit, short duration and full duration. So lots of different returns drivers within those large, holistic portfolio groupings in order to take advantage of the changing environment we're in, we believe. 

Simon Hildrey Thank you James and thank you for watching. We'll see you next time.